 Hello and welcome to this session. This is Professor Farhad in this session. We would look at how to prepare financial statement. This topic is covered in financial accounting, basically an introductory course. Also, the topics are covered on the CPA exam, but this is very basic explanation of the topic. As always, I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1,600 plus accounting, auditing, finance and tax lectures. This is a list of all the courses that I covered, including hundreds if not thousands of CPA questions. On my website, farhadlectures.com, you will have access to additional courses, material, PowerPoint slides, true, false, multiple choice. And if you're studying for your CPA exam, 2,000 plus CPA questions, I strongly encourage you to check out my website. So the first thing we're gonna look at is the four major financial statements and or purposes that I'm gonna illustrate in an example, how do we prepare each financial statement? So the first statement we're gonna look at is called the income statement. What is the income statement? Simply put, the income statement looks at your revenues minus your expenses. So your revenues minus expenses, it described the company's revenues and expenses and compute net income or loss. So if you have more revenues than expenses, let's assume you have 10,000 in revenues, 7,000 in expenses, then you have 3,000 of net income because your revenues are greater, but if you have 10,000 of revenues and 12,000 of expenses, then you have a net loss of 2,000. Simply put, it tells you whether you are profitable or not for a particular period, over a period of time. Period means not a point in time, it's for a period of time. For example, a month, a year, a quarter, okay, so this is what the income statement and obviously we're gonna look at an income statement in a moment. The second financial statement we're gonna be looking at is called the statement of retained earnings. And if you remember, we talked about retained earnings and what did we say? Let's go with this example. If revenues were 10,000, expenses were seven, the company made a profit or net income of 3,000. Now what can the company do with this net income? They can distribute some of it. For example, they can, let's do 50-50. They can distribute 1,500 in dividend and they can keep the 1,500, right? So the amount that they keep is called retained earnings. The amount that you keep from your earnings is called retained earnings. So the statement of retained earnings, explain the changes in retained earnings, so it's gonna start with retained earnings and we're gonna look at it, look at an actual retained earnings, but basically it's gonna start with retained earnings. It's gonna be beginning, BG beginning retained earnings plus net income minus dividend and that's gonna give us ending retained earnings. So this is the whole purpose of this statement of retained earnings. It's gonna explain to you what happened. Those are the changes, the changes in retained earnings, okay? So that's the purpose of retained earnings and obviously we're gonna look at an example. The third financial statement is called the balance sheet. A balance sheet, and by the way, retained earnings also for a period of time, just like the income statement. The balance sheet described the company's financial position. It tells you how much assets you have, liabilities and equity at a point in time. Point means one point, one day, a point in time, a point in time. So what does the balance sheet shows us? The balance sheet shows us the assets equal to liabilities plus equity. That's the balance sheet and those two should equal to each other. Now what is equity? You're gonna see that earnings as part of equity. We'll see that in an example and we're gonna look at a balance sheet. The last financial statements which I don't cover in financial accounting, it's called the statement of cash flows. It identifies the cash inflows and the cash outflows. If you are looking to learn about the statement, you have to go to my intermediate accounting course, specifically chapter 23. There's a one whole chapter about this topic or Google or YouTube far hat statement of cash flows or far hat chapter 23 statement of cash flows. So to prepare the financial statements we're gonna be looking at these summaries of transaction that we prepared in the prior session. And in the prior session, what we did is we looked at all these transactions, all of them, okay? We looked at all these transactions and what we end up is with the ending balances of these accounts, cash, account receivable, zero supplies, equipment, accounts payable, common stock, dividend, revenues and expenses. So we're gonna be looking at these ending balances and from these ending balances we will be preparing the financial statements. Which statement do we prepare first? First we're gonna prepare the income statement. So for every financial statement you're gonna have three headings. It's gonna be name of the statement fast forward, the name of the statement, income statement and the date. Notice it's a period of time. So the income statement is for a period of time and this is for the month and the December 31st. So it's not a point in time. It's not December 31st. It's four month ended. It means it covers the whole month of December. Now what goes on the income statement? Well, what goes on the income statements, your revenues minus your expenses. So first you have your revenues heading and under revenues you could have one or more revenues. In this example we have two revenues. We have consulting revenue and we have rental revenue. A total of 6,100, 6,100. Now where these numbers came from? Well, they came from here. They came from the transactions and this is the rental revenue and the consulting revenue. Okay, so we have rental and consulting and this is what we did. So all these numbers are coming from that exhibit in case you are wondering. So this is our total revenue, 6,100. Then we deduct our expenses that we have an expense heading. Then we, but before I proceed, single underline means we are performing a computation. So 5,500, 300 plus 300 equal to 6,100. Then we have expenses. Then we indent a little when we have a list. Rent expense, we have salaries expense. Those are our two expenses. Then we add them up 1,000 plus 700. Notice we add them up equal to 1700. Now we're gonna take the difference between revenues and expenses and that's gonna be net income. So notice under net income, the 4,400 is double underlined to indicate this is the last number on the financial statement. So this is the income statement. What does that tell us? It tells us that during the month of December of 2019 we generated more revenues than expenses. 4,400 more revenues than expenses. How so? Well, the revenues were 6,100. The expenses were 1,700. The difference is positive 4,400. Is that good? Of course it's good. We wanna generate, we want to generate positive net income. We want to generate more revenues than expenses. So that's the income statement. And in the real world, sometimes this is called the PNL, profit and losses statement. Then we're gonna look at the statement of retained earnings. Same thing, the name of the company, just like the income statement. The name of the statement, statement of retained earnings, then the date. The date is the same as the income statement. It's for a period of time, for a period of time. Now how do we prepare the statement of retained earnings? The statement of retained earnings explain the changes in retained earnings. What does it mean? It's gonna look at the beginning and look at the end and tells you what happened in between. So the beginning was zero. When we started this company, we did not have any retained earnings. It happens to be zero because the company was brand new. Then we had income of 4,400. Income increases retained earnings. Then we paid out dividend, less dividend of 200. So they made a profit of 4,400 and they only took a small amount out of the profit. So the ending retained earnings is 4,200 and notice this number is underlined to indicate this is the last number on this financial statement. Simply put, we had no retained earnings. Now we have 4,200 in retained earnings. So this is the statement of retained earnings. The third financial statement is the balance sheet. And on the balance sheet, we're gonna have the name of the company, the name of the statement balance sheet and the date. Now I wanna make sure you understand that the date is for a point in time in contrast to the other two statements. It's important. It's only a point in time. The balance sheet, it's gonna show us our assets and our liabilities and equity. So our assets are 4,800, 9,600, 26,000. Total assets are 40,400. Notice 40,400 is double underlined. In case you're wondering where these numbers are coming from, again, it's from the previous slide when I started. So you list all your assets in order of liquidity. Later on, we would look at a classified balance sheet. Then we looked at our liabilities. We only have one liability accounts payable. Then we look at our equity. Now our equity is composed of two things. Common stock is one, what the investors put in the company and retained earnings that's coming from the statement of retained earnings. Then we have total equity of 34,200. Liabilities plus equity equal to 40,400. Assets equal to liabilities plus equity. Now notice we have to prepare those financial statement in order. First, the income statement, then the statement of retained earnings because it feeds into the statement of, income statement feeds into the statement of retained earnings through the income statement. Then the balance sheet lasts because we need the retained earnings to complete the balance sheet. So this is in a nutshell, how we prepare financial statement. Now in an intermediate accounting course, you're gonna have one whole chapter about the income statement, one whole chapter about the balance sheet. It's gonna be a little bit more involved. If you have any questions, any comments about this topic, please let me know. 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